Risk-Off Sentiment Strengthens Slide In Treasury Yields

If we do have this consensus that we want to isolate ourselves from China, that’s a big historic shift in U.S. trade policy. We’ve moved away from tariffs as a bargaining chip to get a better deal to tariffs as a means to an end to decouple the economies.

As for Treasury yields, downside momentum is strong. Indeed, the benchmark 10-year rate is close to slipping below the previous low of 2.39% (set in late-March). If that previous floor gives way, the 10-year yield will trade at the lowest level in nearly a year-and-a-half.


The policy sensitive 2-year yield (2.20% on Tuesday, May 14) is also just a tick above the lowest rate since early 2018.


A new round of falling yields on government bonds is hardly limited to the US. Notably, the German 10-year rate has again slipped into negative terrain, in part because of renewed concern that Italy’s preparing to allow the country’s deficit to rise above European Union limits, which in turn is creating fresh demand for safety to ride out any blowback from renewed fiscal turmoil on the Continent.


Will the current scenario convince the Federal Reserve to cut interest rates? That’s considered unlikely for the near term, in part because the US economy has remained strong this year. In particular, the labor market’s growth rate accelerated in April. Perhaps, then, it’s not surprising that Fed funds futures are pricing in a roughly 87% probability that the central bank will leave its current 2.25%-to-2.50% target rate unchanged at next month’s policy meeting, based on CME data.

But the crowd’s renewed appetite for Treasuries, and the commensurate drop in yields suggests that the possibility of a Fed rate cut is growing — a possibility that may be rising via expectations that second-quarter GDP growth for the US is set to ease.

Right or wrong, the crowd is revising its outlook. “The bond market is betting the Fed would have to come off the sidelines and cut interest rates this year,” observes John Briggs, head of strategy at NatWest Markets.

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